MEXICALI VALLEY, Baja California, Mexico - Just north of the U.S.-Mexico border, the All-American Canal courses west from the Colorado River to the farms of California's Imperial Valley. Most of the clear, fresh water rushes toward the perfect rows of alfalfa, lettuce and carrots that spring from this desert. But every year 67,700 acre-feet of it - enough to satisfy the demands of 135,000 California families - escapes through the porous soil below the canal.

A key part of California's 4.4 plan would save some of that precious water by lining a third of the 80-mile canal with concrete. The conserved water would be piped to coastal cities in Southern California.

But what's slipping through the dirt bottom of the All-American Canal is not merely wasted water waiting to be saved. Underground, it flows south to Mexico, where farmers pump it from wells to irrigate their crops. In Baja California's Mexicali Valley, 30,000 people have depended on the water for 60 years. For these farmers, field workers, cooks, mechanics, clerks and others in some 30 rural towns, the lining of the All-American Canal could mean the end of a way of life.

"Many families here depend on agriculture," says Raul Garcia, a farmer and agriculture engineer for an irrigation district in the Mexicali Valley. "It's the only source of employment in the valley, and if there's no water, there will be no agriculture. Es un problema muy grave - a very serious problem," he says.

Seepage from the canal accounts for about 12 percent of the supply to the Mexicali Valley aquifer, but it is by far the purest source. This agua dulce, or "sweet water," as the farmers call it, dilutes the saltier reserves of groundwater. No one yet knows whether losing it will make the water too salty to use, or the pumping too expensive to continue. But Alfonso Cortez Lara, a researcher from Mexicali's Colegio de la Frontera Norte, says the loss will cut up to 20 percent of workable land out of the valley's $240 million farm industry.

Garcia owns a 50-acre wheat farm in Ejido Merida, a community of small farms established by the Mexican land reforms of the 1930s. Here, people rely on well water both for irrigation and human use.

"There are at least 200 families in this ejido alone," says Miguel Banuelos, the ejido president. "A quarter of them own portions of the land, and the others work in the field." Outside the school near a row of small houses, one with the Virgin Mary painted on the front, he waves to a pair of passing women. "These people use the water to bathe. Some who can't afford to buy drinking water use it for that as well," he says. "They won't even have water for basic needs."

Up the street in her dusty yard, Marina Martinez hums as she washes clothes in a plastic tub. She has never heard of the All-American Canal. But thinking about what she'd do if there were no water and no work for her husband in the fields, she says, "I guess we'd starve." She laughs as if it were a crazy notion. "Maybe if we had to leave, we'd try to find work in Mexicali," she adds. "I could clean houses, and my husband could be a security guard. But we would rather stay here. There's nothing like being at home."

But Banuelos is afraid that a time will come when there is no choice but to leave. "Without the water, all agricultural activity could be over for this ejido," he says.

The valley residents have no legal right to the water they stand to lose. It originates as Colorado River water allocated to California, and Mexico still gets its share of the river - 1.5 million acre-feet per year, guaranteed by the Treaty of 1944 - in surface water. The groundwater is just a bonus. Lining the All-American Canal, therefore, would not violate the treaty, say officials from the International Boundary Water Commission (IBWC), the binational agency that settles such disputes between the U.S. and Mexico.

Still, the Mexican government opposes the lining. "It will be very harmful for Mexico," says Moises Dominguez, an engineer from Mexico's National Water Commission. Dominguez says the government has filed its objection with IBWC.

But the joint commission is no longer negotiating whether the canal can legally be lined. "That's not an issue at all," says Robert Ybarra, IBWC's secretary of foreign affairs. Within the organization, he says, "There is no difference of opinion. Those waters are U.S. waters. The issue is one of impact to Mexico."

Mexico is not a top priority for California, which has been saddled by water disputes at home. For 10 years, city water agencies fought agricultural users over the water that would be gained by lining the All-American Canal. In the end, the state government agreed to pay for the project, promising a portion of the conserved water to the San Luis Rey Indian Settlement, and the bulk of it to the Metropolitan Water District, which supplies more than 16 million people, from Los Angeles to San Diego.

Then came the environmental negotiations. To satisfy U.S. laws like the Endangered Species Act, the Imperial Irrigation District, which operates the canal and will build the lining, agreed to lash old tires to the bottom so fish will have reefs. They will cut ridges in the bank so deer will not drown. And they will buy new lands for the flat-tailed horned lizards displaced by the construction.

In the inch-thick U.S. environmental impact report that details these protections, 12 paragraphs address the loss of groundwater in the Mexicali Valley. The report does not say that thousands of people rely on it, or that some of those communities may lose their potable water supply. And if farmers are forced off the land, the family restaurants, the equipment repair shops and other business will likely fold.

As compensation for damage the lining would cause in Mexico, Robert Ybarra says U.S. and Mexican commissioners of IBWC are discussing "a good-neighbor offer" to deliver some of Mexico's Colorado River water to the city of Mexicali through a turnout in the All-American Canal. With shorter distance to travel and the benefit of the canal's de-silting process, the water would be of better quality than that which Mexico gets now.

"But that won't help farmers in the valley," says Miguel Ayon, a young farmer with a mustache and a kind, round face. Ayon manages a branch of the irrigation district in the area that would be hardest hit by the canal lining. With credit hard to come by and the Mexican government no longer subsidizing them, small farms are already facing tough times. And if the Mexicali Valley loses its best water supply, Ayon says that in this region, "they will soon disappear." Then he smiles. "There is a Mexican expression: 'Al mal tiempo, buena cara,' " he says. To bad times, a good face. "What else can we do? Become a U.S. citizen?" Ayon laughs and shakes his head.